How Much Home Can You $Afford

How Much Home Can You Afford

How Much Home Can You Afford

Without fail, it happens month-after-month. Your mortgage payment is due. So when you work on your budget for how much house you can afford, think in terms of monthly obligations.

As a homebuyer the most important question to ask yourself is “How much can we afford to pay each month?” Don’t guess, find your specific number.

After you decide how much you can afford for a monthly mortgage payment you will need to work a little math.

The first step is to add up the following three figures:

  1. The home’s annual real estate taxes, divided by 12.
  2. The home’s estimated annual cost for insurance, divided by 12. Your insurance agent can help with this number, give him a call.
  3. The home’s monthly dues, if there is an association.

Then subtract this sum from your monthly budget amount and your left with your maximum monthly mortgage payment.

Now you need a mortgage calculator, here’s one.

Selling Price$Down Payment$
Interest Rate%Years
Monthly Payment$Change any combination of fields to calculate.

With this calculator enter your maximum payment amount, the loan’s expected term, your down payment amount and the interest rate your bank is giving you for the loan. That’s how much you can afford.

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» Budget For Changes

A home will never be as cheap as when you first buy it if you take care of it. Over time, tax bills will increase and insurance costs will rise. So when you set your budget, make sure to give yourself some breathing room. Of course your income will probably increase over time, but your monthly home payment may increase too.

» Keep Some Money In The Bank

Making a big down payment  on the mortgage is good, but make sure to leave a healthy amount in savings for those unexpected things that always happen. If possible keep at least a 6 month reserve in the bank for those emergencies.

Home Affordabilty

How-Much-Can-You-Afford Tip

Home prices are more affordable today than at any time in the past. Not because home prices are lower, and they currently are, but because interest rates on home mortgages are so low right now.

These low rates extend your buying power more so than lower home prices. But mortgage rates can change quickly. As the rate goes higher the amount of home you can afford goes down.

Example: For each 0.125% increase to mortgage rates, your maximum purchase price must fall by 1.45% to stay “in budget”.

This is why timing the housing market is foolish. Rising mortgage rates can quickly erase your savings.

The type of mortgage you get is important also. A fixed rate mortgage is best if you plan on staying in the home for an extended time. Only use an adjustable rate mortgage if you are not planning to stay long in the house. Adjustable-rate mortgages should not be used as a means to “afford more home”.  Many people have lost there home because of using the ARM mortgage for the wrong reason.

Start your search for your new home now.